The financial year 2003-04 made an impressive
beginning in Pakistan. On one hand the capital market has shown a
robust growth as the KSE-index cross the mark of 4400 points while the
home remittances also sustained their historic performance during the
previous financial year.

At the end of July, 2003 the first month of the new
financial year, Pakistan received home remittances worth over $307
which matched with the amount of home remittances received in July,
2002 indicating that this segment of the financial sector will
maintain its performance during the current year as well.

The home remittances, it may be recalled, had
created a history by recording the highest figure of cash flow from
overseas Pakistanis amounted to $4.23 billion at the end of 2002-03.

The previous financial year ended on June 30, 2003
had recorded an increase of 77.34 percent as compared to the previous
ends remittances. The financial experts are of the view that the
performance during the first month of the current financial year
indicates that this sector is likely to repeat its performance this
year and there are strong indicators that it may perform even better
during the current year.

The total remittances received in the financial
year 2002-03 include workers' remittances amounted to $4.10 billion as
against $2.29 billion during July 2001 to June 2002 showing an
increase of 78.63 per cent over the corresponding period of the
previous financial year. In fact, it is the economics that is now
playing a key role in boosting the flow of the home
remittances.Financial experts while spelling out the factors behind
the quantum jump in home remittances said that there was a chain of
factors working in favor of cash flows from external resources.

Restoration of the confidence in the policies of
the government was however on top of the list. It is the outcome of
continuation of the liberal financial policies, stable exchange rate
leaving no charm in the open market.People now prefer to remit through
official banking channels in view of the process of documentation
which has also started taking roots in the economy of Pakistan.

There were estimates by some quarters that
Pakistanis have at least $32 billion in foreign banks. The banking
sector in the United States as well as other European countries has
started scrutiny of the deposits of the immigrants in the wake of
events of 9/11. Under these circumstances, non-resident Pakistanis
obviously consider their home land as the safer zone for their bank
deposits.

Earlier, the source of home remittances had become
almost dry soon after the decision of freezing the foreign currency
accounts in May 1998 by the previous government. The foreign currency
deposits were estimated at $11 billion at that time but that entire
amount had already been consumed by different governments in the past.
The decision of freezing the foreign currency account also added fuel
to fire as it had badly shattered the confidence of the overseas
Pakistanis. At that time most of the proceeds were received through
unofficial channels like "Hundi" due to highly attractive exchange
rate in the open market. There was a difference of almost Rs10 between
the bank rates and the open market rates of the dollar. That
difference was obviously a big charm for overseas Pakistanis for
remitting their money through unofficial channels and no amount of
patriotism could stop them to take advantage of the exchange rate
differential.

The financial year 2002 was an extraordinary year
for the Rupee. The global crackdown on Hundi network led to the
collapse of the kerb market premium and consequently proved a
turnaround in the exchange rate management strategy in Pakistan. All
of which set the basis for accelerating liberalization of the foreign
exchange market and particularly the removal of segmentation between
interbank and kerb markets.

It is important to note that the massive
improvement in the foreign exchange market post-September 2001
overshadowed the notable exchange rate stability already evident
during financial year 2002. This stability was in sharp contrast to
the 10.9 per cent depreciation of the Rupee during the same period
previously.

The appreciation of rupee caught market
participants by surprise, and their response added further strength to
the Rupee. This also mitigated the impact created by freezing foreign
currency account and people started bringing back their deposits held
abroad.Home remittances have played an important role in the
strengthening country's foreign exchange reserves which also reached a
record high of over $11 billion. Improved financial health of the
country also helped stabilizing the rupee against dollar.

The most significant implication provided by recent
external shock to Hundi network is the opportunity to remove
segmentation in the foreign exchange market. With the kerb premium
floating around almost zero level.

In a scenario when rupee continues to appreciate,
the interest of the individuals would naturally grow in the local
currency as against the previous trend of dollarization which provides
a strong reason for growing the size of home remittances in the days
to come.